Chairwoman Maloney’s Opening Statement at Investor Protection Subcommittee Hearing on the SEC’s Best Interest Rule

Mar 14, 2019
Press Release

WASHINGTON, DC – Today, Congresswoman Carolyn Maloney (D-NY), Chairwoman of House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Market, made the following opening statement at a subcommittee hearing entitled, “Putting Investors First? Examining the SEC’s Best Interest Rule.”

As Prepared for Delivery

“Today we are examining the SEC’s proposed ‘Regulation Best Interest’ — known as ‘Reg BI.’

“This proposal addresses the legal standard that brokers should be subject to when they provide retail investors with personalized investment advice.

“This issue has roots going back decades.

“But for this rule, the story really starts in 2010, with Dodd-Frank.

“When we were writing Dodd-Frank, there was a huge debate about whether brokers and investment advisers who provide advice to retail investors should be subject to a uniform fiduciary duty. And in the House bill, we did subject brokers to the same exact fiduciary duty that investment advisers are already subject to — we said that the SEC shall write rules ensuring that brokers who advise retail investors are subject to a legal standard that ‘shall be the same as the standard of conduct applicable to an investment adviser.’

“But, the Senate took a different approach. They said that the SEC should first conduct a comprehensive study of whether a uniform fiduciary duty is appropriate for brokers and advisers. And then if the SEC’s study found that a uniform fiduciary duty is appropriate, the SEC would be required to write a rule implementing the results of the study within 2 years. And in fact, the author of that Senate provision was Senator Crapo, who is now the Chairman of Senate Banking.

“The final version of Dodd-Frank required the SEC to conduct the study, and then simply authorized the SEC to write a rule mandating a uniform fiduciary duty.

“So, the SEC staff dutifully conducted a comprehensive study, and in 2011 they submitted a 208-page report recommending very explicitly that the SEC adopt a rule subjecting brokers who provide investing advice to retail customers to the same fiduciary duty as investment advisers.

“Unfortunately, despite the staff’s recommendations, the SEC spent 7 years dragging its feet, refusing to even propose a uniform fiduciary duty rule.

“All the while, the harm to retail investors just kept mounting. In 2015, a study from the White House Council of Economic Advisors found that investment advice tainted by conflicts of interest were costing retail investors roughly $17 billion — every year.

“So, the Department of Labor, which has jurisdiction over retirement investing, stepped in and proposed its own fiduciary rule.

“The DOL rule would have subjected brokers and advisers to a very strong fiduciary duty and would have required them to eliminate harmful conflicts of interest.

“But, the industry filed numerous lawsuits challenging the DOL rule — and even though the rule was upheld in most courts, a single 3-judge panel in the 5th Circuit in Texas struck the rule down nationwide. And the Trump administration refused to appeal this court decision, purely out of political spite.

“So, after years of inaction, the SEC finally proposed its own rule in April of 2018 — which is the rule we’re discussing today.

“While the SEC’s Reg BI may be an improvement on the status quo, it is still far too weak, and I still have several serious concerns with the rule.

“First, despite the SEC staff’s own recommendation to subject brokers and advisers to a uniform fiduciary duty, Reg BI does not subject brokers to a full fiduciary duty, like the DOL rule would have. Instead, the SEC’s rule says that brokers who provide advice to retail customers have to act in the ‘best interest’ of the customer — but refuses to define ‘best interest.’

“And instead of saying that brokers have to provide advice ‘without regard to’ their own financial interests — which Dodd-Frank specifically required — the SEC’s rule actually does allow brokers to take their own financial interests into account.

“Finally, the rule relies far too much on disclosing conflicts of interest, rather than simply eliminating conflicts.

“Taken together, these shortcomings mean that the SEC’s rule will still leave retail investors dangerously exposed to substantial losses caused by advice from hopelessly conflicted brokers.

“I strongly urge the SEC to strengthen its proposed rule, so that retail investors get the protections they need and deserve.

“We’re also examining a legislative proposal from my colleague Mr. Casten, which would simply require the SEC to conduct usability testing on their new disclosure forms before finalizing Reg BI — which I think is an excellent idea.

“And I look forward to hearing from our distinguished panel of witnesses about this incredibly important topic.”